INTRODUCTION

Arbitrability of disputes that are excepted from the purview of arbitration under the parent agreement/contract has long been discussed in great depth by the courts in India in the last decade. Many PPP contracts are now incorporating a clause that 'excepts' certain matters from the purview of arbitration, with a view to amicably resolve the said disputes through an internal dispute resolution mechanism of the public company/authority that is better equipped to settle the disputes, since they are more technical in nature and may not always involve complex questions of law. An example of a dispute resolution clause which 'excepts' certain disputes from being referred to arbitration is reproduced herein under:

"In the event of any question, dispute or difference arising under this agreement or in connection there-with (except as to the matters, the decision to which is specifically provided under this agreement up to the installation and commissioning stage), the same shall be referred to the sole arbitration.

In cases wherein one party is aggrieved by the material defaults of the other, and where the arbitration clause 'excepts' certain matters from the purview of arbitration, it may file a petition under Section 11(6) the Arbitration & Conciliation Act, 1996 ("Act") and the competent Court after allowing the petition, may direct the arbitrator/tribunal so appointed to decide on its own jurisdiction in cases where the dispute raised is an 'excepted matter' under the agreement. Consequently, the party objecting to the jurisdiction of the arbitral tribunal may file its objections before the constituted arbitral tribunal which shall then decide the issue of arbitrability in terms of Section 16 of the Act, either at the preliminary stage or after the final arguments and before passing of the award. It is pertinent to note that over the years, the Hon'ble Supreme Court has held that the disputes 'excepted' from the purview of arbitration are arbitrable and can be submitted to arbitration on certain grounds. This article discusses the issue of arbitrability of 'excepted matters' and how jurisprudence has developed over the last 10 years through various important judicial pronouncements.

CATEGORIES OF 'EXCEPTED MATTERS'

The law on 'Excepted Matters' in Arbitration has developed exponentially in the last decade as more and more contracts are now incorporating two different categories of 'excepted matters' in the Arbitration clause1.

The first category of 'Excepted Matters' clauses is those wherein as per the clause the concerned authority's decision on the issue/dispute raised by either of the parties is final and binding upon them.

The second category is the more common containing a proviso that the claims are not capable of being raised or adjudged by employing the language "shall not be payable", "no claim whatsoever will be entertained by the Authority", or "no claim will/shall be entertained". The above two categories pertaining to the scope of excepted matters have been discussed by the Hon'ble Supreme Court in the following cases:

  • First Category of 'Excepted Matters': The Division Bench of the Hon'ble Supreme Court in the case of Vishwanath Sood v. Union of India (AIR 1989 SC 952(SC) construed the expression 'The Superintending Engineer's decision shall be final' in clause 2 of the conditions of contract in respect of quantification of claims stating that reference is made only to finality by a specified official in the department; in other words, this clause only constituted a declaration that no officer in the department can determine the quantification and that the quantum of compensation levied by the Superintending Engineer shall not be changed without the approval of the Government. The Court observed that Clause 25, which was the arbitration clause, started with an opening phrase excluding certain matters and disputes from arbitration and these were matters or disputes in respect of which provision had been made elsewhere or otherwise in the contract. In view of the same, the Court opined that the phrase 'Superintending Engineer's decision shall be final' used in clause 2 meant that certain types of disputes shall be left for adjudication by the administrative authorities concerned. If that is not so, the words 'except where otherwise' provided in the contract would become meaningless. The Court therefore, held that on a bare perusal of clauses 2 and 25 "the conclusion is irresistible that the amount of compensation chargeable under clause 2 is a matter which has to be adjudicated in accordance with that clause and which cannot be referred to arbitration under clause 25"
  • Second Category of 'Excepted Matters': Similarly, the Hon'ble Supreme Court brought in the concept of excepted matters to some other categories also. The Supreme Court in the case of General Manager Northern Railways & Anr. v. Sarvesh Chopra 2002 AIR 1272 considered the matter and held that a bare reading of Clause 63 (which was the Dispute Resolution clause) showed that it consisted of three parts. The Court observed that one of the three parts was a proviso, having an overriding effect on the earlier parts of the clause, that all 'excepted matters' shall stand specifically excluded from the purview of the Arbitration Clause and hence shall not be referred to arbitration. The Court went on to observe that the source of controversy is the expression "matters for which provision has been made in any clauses of the Special Conditions of the contract shall be deemed as 'excepted matters' and decisions thereon shall be final and binding on the contractor." The Apex Court held that those claims which are covered by several clauses of the Special Conditions of the Contract can be categorized into two. One category is of such claims which are just not leviable or entertainable. Each of these clauses provides for such claims being not capable of being raised or adjudged by employing such phraseology as "shall not be payable", "no claim whatsoever will be entertained by the Railway", or "no claim will/shall be entertained". These are 'no claim', 'no damage', or 'no liability' clauses. The Court held that "this category is an 'excepted matter' because the claim as per terms and conditions of the contract is simply not entertainable".

ARBITRABILITY OF 'EXCEPTED MATTERS'

From the above judgments, it is seen that prior to 2009 claims/disputes that were 'excepted' from the purview of arbitration and to be mandatorily decided by the Competent Authority as per the terms of the Dispute Resolution clause, were non-arbitrable and as such could not be submitted to arbitration under the Arbitration & Conciliation Act, 1996. That is to say that the decisions on the dispute raised by the parties were final and binding in terms of the express clause that attached finality to the dispute under the contract/agreement. However, post-2010 the Hon'ble Supreme Court has allowed the parties to refer the disputes to arbitration even though the agreement contains an 'Excepted Matters' clause. Let us look at the landmark judgments delivered by the Hon'ble Supreme Court on the arbitrability of 'Excepted Matters' post-2009:

  1. BSNL v. Motorola India (P) Ltd (Hon'ble Supreme Court) ((2009) 2 SCC 337): The question to be decided in this case was whether the liability of the respondent to pay Liquidated Damages in terms of Clause 16.2 of the contract, which provided for the "quantum of liquidated damages assessed and levied by the purchaser shall be final and not challengeable by the supplier", was an excepted matter under Clause 20.1 of the General Conditions of contract (i.e., the arbitration Clause).
    The Apex Court held that Clause 16.2 cannot be treated as an excepted matter because of the fact that it does not provide for any adjudicatory process for a decision on a question, dispute or difference, which is the condition precedent to lead to the stage of quantification of damages. Further, it reasoned that the Appellant's reliance on Vishwanath Sood v. Union of India (AIR 1989 SC 952(SC) is wrong in as much as in that case a particular claim of the government was excluded because the Superintendent Engineer acted as the revisional authority to decide disputes between the two parties by an adjudicatory process, there complete machinery for settlement of the disputes in the relevant clause.
  2. Madnani Construction Corporation vs. Union of India and Ors. (AIR2010SC383): The Apex Court held, "It goes without saying that in order to deny the claims of the contractor as covered under excepted matters, the procedure prescribed for bringing those claims under excepted matters must be scrupulously followed". The Court finally held that, "the clear finding of the arbitrator is that it has not been followed and the High Court has not expressed any disagreement on that. Therefore, the finding of the High Court that those items are non-arbitrable cannot be sustained".
  3. Union of India vs Chenab Construction Company: The learned Single Judge of Delhi High Court observed that "mere labeling a claim as "Excepted Matters" does not make it an Excepted Matter. The onus was on the appellant to show that a particular claim as per the contract had to be decided by a particular authority whose decision is final but no such contention has been raised by the appellant".
  4. Lift and Shift India Pvt. Ltd. vs. Central Warehousing Corporation (240 (2017) DLT 14): The learned Single Judge of Delhi High Court held, "that when there was no adjudication by the Senior Officer, then there was an abandonment of the right to adjudication. Further, it went on to hold that in the impugned Award, the arbitrator declined Claim Nos. I (1) to (3), III (1) to (3) and VI (a) to (e) as being excepted matters without actually examining if the foundational conditions for such exclusion were satisfied. It was incumbent on the CWC to show that the facts necessary for invoking the defence of excepted matters existed. In other words, in order to exclude the above claims from the purview of arbitration, there had to be a decision on such disputed issues by the RM. The CWC was unable to produce the copy of any such decision by the RM". In view of the above, the Court therefore held that the disputes were arbitrable.

AUTHOR'S ANALYSIS/CONCLUSION

The position on Arbitrability of 'Excepted Matter' has now come to be settled by the Hon'ble Supreme Court. The Hon'ble Supreme Court in many cases has allowed the parties to arbitrate even in respect of disputes that are excepted from the purview of arbitration in the applicable arbitration clause. It is trite that where there is no machinery/process in place for a decision on a certain matter, along with an adjudicatory process thereof, such a matter cannot be held to be an excepted matter under the terms of any arbitration clause2. Further, it is also trite that even when there is a complete mechanism provided for in the agreement, the excepted matter cannot be taken out of the purview of arbitration until and unless the procedure prescribed for bringing those claims under excepted matters is scrupulously followed3. It is also trite that to exclude any claim from the purview of arbitration, there has to be a final and binding decision on such disputed issue by the authority so authorized to resolve such disputes under the terms of the agreement4. In view of the above, it is a settled position of law that if the aforesaid conditions laid down by the Courts are fulfilled, then the disputes falling under the 'Excepted Matters' clause can be referred to arbitration, even though the agreement expressly bars those disputes from the purview of arbitration.

Footnotes

1 Vishwanath Sood v. Union of India (AIR 1989 SC 952(SC), General Manager Northern Railways & Anr. v. Sarvesh Chopra 2002 AIR 1272

2 BSNL v. Motorola India (P) Ltd (Hon'ble Supreme Court) ((2009) 2 SCC 337)

3 Madnani Construction Corporation vs. Union of India and Ors. (AIR2010SC383)

4 Union of India vs Chenab Construction Company

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.